This is more than just a 7%-10% correction

(Feb 11, 2010)

In this issue:
» The empire of Debt is crumbling
» Government considers rolling back stimulus
» IT hiring is picking up once again
» Obama comes under fire
» ...and more!!

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00:00

'This is more than just a 7%-10% correction', screams a headline on one of the financial portals. The man behind the quote is none other than the famous financial observer and trader Dennis Gartman. In a recent interview, Gartman has opined that it would be a mistake to aggressively buy stocks at the current juncture. He fears that a deep correction in stocks across the globe could happen anytime soon. And he has based his observation on the fact that unlike the previous correction in US equities a few months back, the correction this time around is far more spread out. In other words, it has engulfed practically the whole world and this, as per him is a dangerous sign. He further observes that confidence, which is so key to the functioning of any financial market has gotten badly affected with events like the Greece debt crisis. And this too, does not bode well for capital markets including equities.

If the fundamentals would have pointed to another direction, we would have certainly taken traders like Dennis Gartman with a pinch of salt. However, even in India, the fundamentals seem to be pointing towards a not very rosy picture from a 1-2 year perspective. Even after the recent correction of the order of 10%-12%, it has become difficult to justify investment into a fundamentally sound company, run by a credible management team. It is the price that such stocks are commanding that is worrying us. Thus, while we may not know whether this is more than just a 7%-10% correction, what we know with a far greater degree of confidence is the fact that a significant correction from the current levels would set us up nicely for attractive gains over the next 2-3 years.

00:59

Chart of the day

United States of America. The Mecca of capitalism. However, over the past couple of decades, the famous tag has begun to wear off a bit. It is in the nature of capitalism that government intervention is kept to a bare minimum. Flawed business models and excessive risk taking should be allowed to fade into the oblivion so that a strong foundation is laid for another set of businesses to take over. And such a system worked very well in the US till as late as the 90s. But after that, Government meddling started raising its ugly head. It prevented failed businesses from going bust by supporting them. The end result? Inefficient use of capital. Resources were diverted towards less productive activities and as shown in the chart of the day, debt required to produce one unit of GDP skyrocketed. Looks like the US is heading the Japan way. Some lessons there for India and China as well, we believe.

Source: The Economic Times

01:42

It has been proved beyond doubt. India has managed to escape one of the worst financial crises in modern times. There are signs of growth revival everywhere. India is expected to close the fiscal year 2010 with a respectable growth of upwards of 7%. However, this has not come without any cost to the economy. A good part of the growth could be attributed to fiscal stimulus undertaken by the government. And this meant enduring a greater than usual fiscal deficit. 6.8% of GDP to be precise. It should be noted that this is far higher than the 2.5% envisaged in the Fiscal Responsibility and Budgetary Management Act.

Hence, it is only obvious that Government would aim to bring the deficit down to more manageable levels. There are talks doing the rounds that the Finance Minister would hike the excise duty by 2% during the forthcoming budget. While this would still be lower than 16% that prevailed before the crisis, it will nevertheless give the government decent headroom to grow revenues and at the same time, not have too much of an impact on demand as most companies would be able to absorb most of this stimuli and not fully pass it on to consumers. However, it remains to be seen whether the government will hike duties across sectors or be selective in its approach.

02:27

Barack Obama may have garnered a lot of support and votes to head the United States, but is certainly finding it difficult to live up to expectations. For instance, the US President has received dollops of criticism for the way he is handling the current financial crisis. One of his detractors is none other than the economist Arthur Laffer. According to Laffer, Obama's proposed budget is the 'perfect plan for catastrophe,' for showing no spending restraint and for raising tax rates. At the height of the crisis, the US government injected massive doses of liquidity into the financial system and aggravated an already serious deficit problem.

While this was necessary in preventing a total collapse of the financial system and the economy, the fact that it had to be done with taxpayer's money created a furore. As Laffer has put it, "You can't bail someone out of trouble without putting someone else into trouble. For every stimulus check written, there is a liability to someone else." It is certainly a tough time for the President. He has to take a call on whether he wants to take some short term measures and maintain his popularity or introduce long term measures which will have a positive impact on pulling the US out of the slump. Either way, his actions will be minutely scrutinized.

03:12

Techies are back in demand, and in big numbers. Biggies like TCS and Infosys have already set the stage by announcing big hiring plans for the next fiscal (FY11). And these plans can be seen as hinting towards better visibility that these companies have with respect to their next few years' business. Now while these companies plan to hire big time, a large part of the new hires will be freshers. This would not exert much pressure on these companies' cost base thereby helping them to continue to earn good margins.

03:29

It is time to bite the bullet. Banks that have so far been wooing unsuspecting borrowers with 'teaser rates' on loans have to uncover the truth. With the RBI having signaled a rate hike, it is now the banks' turn to ensure that their loans get appropriately priced. Most banks including
SBI which started the trend have indicated withdrawal of the teaser rates. In some cases this would mean a significant jump in equated monthly installments (EMIs) for the borrowers. While the banks would now earn a higher margin on these loans, it will not necessarily flow into their bottomline in the short term. Bankers opine that they will have to provide more for the higher possibility of slippages on such loans. We believe that having accumulated loans at unsustainable rates, the banking sector is set to witness a high NPA ratio, unless the players can provide for the risk.

03:59

In an interesting reversal of roles, Warren Buffett recently donned the hat of an interviewer. His guest- former US Treasury Secretary Hank Paulson. Mr. Paulson believes that the US financial crisis would have reached disastrous proportions had it not been for timely intervention by those in charge. He says "As bad as this is, when we look back it's not as bad as it could have been". Businesses would not have been able to fund themselves. They would have cut down operations and fired employee. Employment rate could have touched 25% in the US.

In his opinion enough credit is not given to those who helped contain the crisis. In terms of future outlook, he believes the US is in a much better position than many other countries. He is not as worried about the US Dollar now. Moreover, the US government may actually end up with a profit from the bank bailouts. Interestingly, Mr. Paulson, a former top investment banker himself, believes that salaries on Wall Street are out of whack. It remains to be seen how justified his confidence proves out to be. But we could hardly disagree with the fact that investment bankers earn too much for a tribe that endangers the entire financial system from time to time.

04:42

Meanwhile,Indian stock market traded strong right from the beginning today with the BSE Sensex having edged higher by around 270 points at the time of writing. BSE Midcaps and Small caps are not exactly showing the same strength as their large cap counterpart but are still comfortably in the positive. The Sensex is deriving its strength mainly from commodities and IT heavyweights.

04:56

Today's investing mantra

"Risk comes from not knowing what you are doing." - Warren Buffett

The 5 Minute WrapUp Premium is now Live!

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the gold prices are expected to increase more than 80 percent within one year, there will be a major correction of 25 to 45 percent correction in Indian share market will start from end of march slowly and maximum correction will happen in the first week of April.correction in USA will be more than 60 percent.all the investors should should limit stock position to a maximum 25percent of present holdings and buy after major correction

dear sir, mr Ajit dayal has in his web seminar catpioned "where is the stockmarket market headed ln 2010' strongly belives that the sensex should reach 21000 or so by the end of the year andhas cited the reasons for the same. But in this 5 minutes wrap up which i am reproducing hereunder his magazine presents an exactly contrary view. can you explain this contradiction
"If the fundamentals would have pointed to another direction, we would have certainly taken traders like Dennis Gartman with a pinch of salt. However, even in India, the fundamentals seem to be pointing towards a not very rosy picture from a 1-2 year perspective. Even after the recent correction of the order of 10%-12%, it has become difficult to justify investment into a fundamentally sound company, run by a credible management team. It is the price that such stocks are commanding that is worrying us. Thus, while we may not know whether this is more than just a 7%-10% correction, what we know with a far greater degree of confidence is the fact that a significant correction from the current levels would set us up nicely for attractive gains over the next 2-3 years."

Situations change pretty fast and they do warrant timely revised assessments. You are doing that with competence. Even in these trying circumstances, it should not be difficult for a shrewd investor to spot the fundamentally strong scrip, buy small quantities of them at every dip, sell them at every price-rise and make reasonable profit. Of course, avarice has no place in share trading.

It is an excellent write up, as also reveals transperantly where Mr. President USA stands, and what is needed for US at the hands of Mr.President whether for short term or long term, either way that will fall under criticism on instance.

Why is that your newsletters all the time carry more negative views than positive?

Is it because, you want to say at a later stage that "I told you before?".

On the one hand, you advertise on all financial portals about why Sensex will be 21K by March 2010. And then on the other side, on your daily wrap up you continue to build negative sentiments.

This is the second time I am writing this to you. Please review your daily wrap for the past six months and see how much of negative messages are packed there. The only thing you write positive about is on Gold and that too to promote Quantum Gold ETF.

One of the main contribution of higher fiscal deficit in India is the uncontrollable cost of most of the PSUs under the control of the Government of India. While the Government said about loss of Oil companies due to so call subsidised pricing of petrolum product, there seems to be no control on expenditure of the companies in the matter of salary and parks to its employees.
This trend is now spreading to Central Government owoned Electricity companies which resulted uncontrollable increase of cost of power generation which resulated higher pricing of retail electricity by the consuming discoms. Already substantial subsidy has been granted by richer states to the state utilities but the states having poor finance is not able to provide any support to the utilities leading to detoriation of service. This issue need exclusive discussion by your esteemed news e paper.

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